The Tax Gradient: Spatial Aspects of Fiscal Competition
49 Pages Posted: 23 Apr 2015
Date Written: April 23, 2015
State borders create a discontinuous tax treatment of retail sales. In a Nash game, local tax rates will be higher on the low-state-tax side of a border. Local taxes will decrease from the nearest high-tax border and increase from the low-tax border. Using driving time from state borders and all local sales tax rates, local tax rates on the low-tax side of the border are 1.25 percentage points higher, reducing the differential in state tax rates by over three-quarters. A ten minute increase in driving time from the nearest high-tax state lowers a border town’s local tax rate by 6%.
Keywords: sales taxes, cross-border shopping, tax competition, fiscal federalism
JEL Classification: H200, H250, H730, H770, R510
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